Margin investing is a strategy where an investor borrows money from a brokerage to purchase more securities than they could with cash alone. This leverage can amplify both potential gains and losses, as the investor must repay the loan plus interest. The securities in the account are often used as collateral for the loan. 

How it works

• Borrowing to invest: An investor opens a margin account with a brokerage and uses their existing securities as collateral to borrow money for new investments.
• Increased buying power: This allows the investor to purchase more shares, or other securities, than they would be able to with only their own cash. For example, under Federal Reserve Board Regulation T, an investor can borrow up to 50% of the purchase price for certain securities.
• Interest payments: The investor must pay interest on the borrowed amount, which is charged on the loan balance for as long as it is outstanding.
• Potential for higher returns: If the investments increase in value, the returns are amplified because the investor holds more shares than they could have afforded with just cash. For example, a 100% gain is possible on a stock if you pay $25 cash and borrow $25 to buy a $50 stock, and the stock price rises to $75.
• Risk of amplified losses: Conversely, if the investments decrease in value, the losses are also magnified, and the investor can lose more than their initial cash investment.
• Margin call: If the value of the securities in the account falls too low, the brokerage can issue a “margin call,” requiring the investor to deposit more cash or sell securities to meet a minimum equity level. 

Key considerations

• Risk: Margin investing is a higher-risk strategy that can lead to losses exceeding the initial investment.
• Interest: You are charged interest on the loan, which adds to the cost of the investment.
• Collateral: The securities in the account are used as collateral for the loan.
• Liquidity: Margin accounts can provide quick access to funds without selling holdings, which can be useful for unexpected expenses.
• Regulation: The mechanics and rules of margin lending are overseen by financial industry regulators and brokerage firms.